Since the market started experiencing the major swings back in late January, the biggest question that seems to be on everyone’s mind is whether this is the start of the next bearish phase or not. After watching the market go straight up in 2017, all of the sudden investors are concerned. But I don’t think we need to be worried, at least not yet.
The reason I don’t think we have to worry yet is based on the sentiment readings we are seeing from different indicators. One indicator that got my attention recently was the Conference Board’s Consumer Confidence reading for April.
The most recent reading came in at 128.7 and that is well above the historical average. Under normal circumstances, the high reading would concern me. But I went back and looked at the historical data. Back in the late 90’s and early 2000’s, the readings were higher than they are now and they stayed elevated for a number of years.
I put together this chart that shows the consumer confidence readings along with the S&P 500. What I learned from this task was that the level isn’t a very good predictor when it comes to predicting bear markets. What is important is when the index falls more than 10% from its high reading.
If you look at the two bear markets from 2000 to 2002 and 2007 to 2009, we see that the consumer confidence readings were at much different levels. Consumer confidence reached as high as 144.7 in February 2000. By January 2001 it had fallen by more than 10% and investors could have saved themselves a lot of money by getting out of stocks. In August 2007, consumer confidence peaked at 111.9. It then dropped sharply and by October 2007 it was below 100 and had dropped 10%. Once again investors would have saved themselves a lot of money by getting out of stocks at that time.
At this point, the highest reading in consumer confidence came in February at 130.8. A 10% drop from there would put the index under 118. If consumer confidence starts going down from here, I will certainly be watching to see if and when it drops below that level.
There was another interesting aspect of the consumer confidence report in April. One piece of the index is consumer expectations for the stock market. In April, that portion of the index came in at its lowest reading since November 2016. That was right in the middle of the election mess and investors were anxious about how the election would turn out. It turns out that it was a great buying opportunity as stocks rallied sharply from there.
There are other sentiment tools that show how investor sentiment has dropped sharply since January. As a contrarian, that is a good thing. Investors are behaving like we want them to. If investor sentiment was still extremely bullish, I would be worried.
From what I am seeing at this point, this isn’t the beginning of a bear market. At least not for now. If the sentiment starts creeping back up, then I will be worried.